At times like these, when the Fed seeks to stimulate economic expansion, the sector that should benefit most is “low quality.” However, I view the current market environment illusory, and providing a sort of growth hoax that I expect will be exposed after the Fed’s Halloween meeting. Due to my view that the Fed might let the market down with rate inaction or a policy statement that indicates an inclination for forward neutral bias, I looked for short ideas where stocks that have run higher on expansionary rate expectations could give back gains after Halloween.
(Companies in article: POOL, TSCO, OO, ELY)
In my years as a Wall Street analyst, I never came across a better stock than that of Pool Corporation (Nasdaq: POOL). I use to jest that a framed picture of POOL’s stock price chart on my living room wall would be more beautiful to me than the Mona Lisa. Pool’s CEO, Manuel Perez de la Mesa, proved to be one of the best executives I ever came across, outside of perhaps Tractor Supply’s (Nasdaq: TSCO) Jim Wright, who quickly turned that operation around.
However, during my coverage of POOL, I often debated with Manny about the potential impact of a housing downturn, one I suspected would be inspired by higher interest rates. This later proved prescient, after I left Wall Street, and we are now in the midst of the result.
We have now experienced two weeks of stock decline, as concern about the economy and the dollar have overtaken concern for inflation. When the market was enthusiastic over the potential for an interest rate cut, we warned that choppy sideways trading was likely to be the norm until it became evident the market was either heading for recession, a soft landing or stagflation. The consensus today is negative, but we once again advise investors to stay calm as the direction of the economy has yet to be decided.
U.S. equities are moving higher today, as new housing starts came in ahead of expectations. However, the report was not conclusive, as permits declined. Overseas, the Bank of Japan kept rates steady, and Asian markets were mixed but mostly positive. U.S. equities should tread cautiously as tomorrow’s conclusion to the two day Fed meeting looms.
Hang Seng Index +0.47%; Shanghai/Shenzhen 300 +0.5%; NIKKEI 225 +0.9%; Taiwan TAIEX -0.02%; BSE SENSEX 30 +0.48%; KRX 100 -0.02%; Ho Chi Minh -1.42%
U.K., Europe & Middle East:
DJ STOXX 50 Index +0.73%; FTSE 100 +0.41%; CAC 40 +0.81%; DAX +0.32%; Russian RTS Index -0.82%
Key Headline News:
We’re sorry to say, we see no likely positive catalyst this week to avoid market retest, other than perhaps the technical barrier of 1,350 itself. In recent recessions, the market has managed to hold the halfway point from market bottom to rally peak. That mark is 1,350 on the S&P 500, and everyone is looking to it as a critical floor. We may just fall through that shaky base, depending on what the lunatic depicted here has to say this week. So, welcome back to Armageddon my friends. We have an interesting “Iran Event” piece coming up this week, so stay tuned.
Is there a poison apple in your portfolio? You may not think so, but I would not own the shares of this seemingly juicy fruit, despite solid earnings momentum and a valuation I view inexpensive relative to growth.
The shares of Apple Inc. (AAPL) rose 1.1% on Friday, after climbing 3.7% Thursday, the day after the company posted stellar quarterly revenue and earnings growth. Revenues climbed 21% in the company’s fiscal second quarter ended in March, boosted by expanding sales into Europe. Apple’s top line was driven by 36% growth in Mac shipments and a 24% increase in iPod sales. Earnings per share soared 85%, as gross margin widened by 500 basis points to 35.1%. However, the company’s guidance for the fiscal third quarter did not excite, with revenues seen approximating $5.1 billion and EPS $0.66, a penny short of the consensus view compiled by Thomson Financial. AAPL’s iPhone launch isn’t expected until June, and thus, will not impact the coming quarter in a meaningful way, according to Apple.